Elements of a Bad Faith Claim I
Prof. Bill Long 3/9/05
After spending a day considering the facts and results of the Goddard case, I would like to advance some suggestions on how one ought to look at bad faith insurance claims. Of course, each jurisdiction will do it based on its own law and traditions, but I think some common concerns should drive the effort. This mini-essay and the next examines the role of facts, the insurer's conduct after being notified of the loss, the insurer's conduct before trial and the insurer's conduct after trial.
Let's begin with some observations that Abraham makes in the case book about where things are today. First, he mentions that the dominant approach today is that this cause of action should sound in tort rather than contract (p.381). Tort opens up the big bucks, as you know, because of potential for non-economic and punitive damages (in addition to economic damages), whereas a contract law approach would focus mostly on economic damages.
Abraham also observes that courts have struggled to come up with a statement specifying the type of behavior that triggers a bad faith claim (p.382). Should it be more than negligence? Yes, almost all would say. How much more? Should recklessness be required? Probably so. Intention? Probably not. He says that a number of courts have developed a fairly precise test. The insurer would be liable against a bad faith claim if their denial of a claim is not "fairly debatable." That is, if it is pretty clear that the claim is covered, it would be bad faith not to pay it.
What does this mean? I believe the two policies at issue in the Goddard case help clarify the test. In my judgment, though it was "fairly debatable" whether the exclusion in Munson's policy would allow coverage, it was not "fairly debatable" whether Foley's policy covered the loss. You might say, however, that it requires an "intensive factual inquiry," or some such legal phrase, in order to determine in fact if Munson was driving with her permission. I don't think so, however. A reasonably quick investigation by an insurance adjuster could have ascertained that Munson drove her pickup regularly when he did odd jobs for Mrs. Foley.
I think a helpful distinction to keep in mind might be the one I gave in class for defining what an ambiguity was. Recall that I said that an ambiguity is not where a provision could be subject to alternative interpretations but where it could be subject to reasonable alternative interpretations. So, here. The fact that an insurer could come up with an explanation of why Foley's policy wouldn't cover Munson's driving is not at issue; it would be whether the insurer's explanation was reasonable.
Making the Case--My Overall Approach
Thus, in my approach to the issue, I am not going to use the analogy of, say, FRCP 17 for imposing attorney sanctions, where in order to impose sanctions the attorney action must have not been justified by any construal of current law or reasonable extension thereof. I think that an insurer refusal to pay based on its reading of a policy exclusion, in order to avoid a bad faith claim, has to be not a "fringe" argument but an argument that would have colorable and even credible legal support. Thus, I would consider it a "smoking gun" against the insurer, and a strong argument for the insured, if they discovered a company policy to "deny all claims" initially as part of a strategy of wearing down claimants. Even an interoffice memo or testimony to the fact that the insurance company tended to "low ball" claims, either as a way of hoping the insured/injured would go away or even as an invitation to negotiation, would run perilously close to bad faith in my construal of it.
My approach in the proceeding paragraph emerges from two realities of human life when accidents potentially covered by insurance take place. First, these accidents can disrupt life in a major way, and it is best for the individual and society at large if a person's life can be resumed, as well as possible, in the quickest time. Second, when a compensable or probably compensable accident occurs, there is a reasonable expectation that coverage will be forthcoming in a timely fashion. It takes a considerable wear and tear on people to have to work through the hassle of insurance adjusters and agents when they have suffered a loss. Thus there are considerable inequities in a situation after loss. Do you think that the insurers know this? Of course. My proposal would be an attempt to try to "level the playing field."
The natural rejoinder, I would anticipate, is that insurance companies need to protect themselves against fraudulent claims. Everyone knows that people go to the ones with the deep pockets when there is injury. Insurers, like everyone else, need to protect their assets (and the word which results from dropping the "t") and therefore must be circumspect before giving out money. Once the check is cut, they will never see it again, if they have paid it out improperly.
Where do you stand on this one?
Copyright © 2004-2007 William R. Long